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Showing the True Benefit of EDI to the Bottom Line

WASHINGTON, DC - MAY 18:  In this handout imag...

Few would argue that expanding an organization’s EDI and electronic commerce program is not a worthwhile endeavor, but in the current environment of tight corporate budgets, how does the IT staff convince senior management to not cut the budget for EDI initiatives but rather increase those funds?

With constant pressure from inside and outside forces to be at the forefront of their specific market, management typically has to manage a balancing act. It’s necessary to meet market needs as well as find internal efficiencies to ensure the organization is in the best position.  In my experience, the best strategy for the IT staff is to present quantifiable numbers to management that explicitly show the cost savings the EDI program provides to the bottom line.

Understanding the need to show the benefit to the bottom line is the easy part. The real work comes in deciding exactly how to represent those numbers to management. There have been several studies done in the past few years that show specific parts of the EDI process, but they usually focus solely on purchase order processing times or cash cycle improvements of the invoice. While these studies are a good generic starting point, do they really show the whole picture for your situation? Since each organization’s EDI infrastructure is unique, an important question to ask is if those generic numbers would suffice?

So now you have decided that you want to perform the cost/benefit analysis to get closer to the specific savings that your EDI program affords rather than use the generalities that a cross-industry study provides. Where do you begin? Since every organization is a bit different in infrastructure, documents supported, communication protocols used, and translation practices, it would be a good idea to get a high level view of the process and what each piece costs.

Second you want to determine which business cycle you want to measure. Would requisition to order, purchase to pay, invoice to pay, or a combination of these cycles be most beneficial? When this is determined you can go about your cost analysis by tracking several inbound purchase orders and establishing the actual processing costs associated with each. The next step would be to take a similar sample of orders that come in and must be processed manually in order to determine the per order processing costs. These might include such as data entry labor costs, fax services, paper etc. The delta between these two numbers is then your cost savings per order.  This is where most generic studies stop, but this is not a true indicator of actual benefit - only a small piece.

Since there are many documents in your EDI tool belt other than the 850, what value and efficiencies do these bring to the table? Take for instance the Order Acknowledgement 855. Generating this document saves the company time and resources by notifying the ordering party that the order was received and if there are any issues with the specific items. How much time does the customer service department spend answering such questions? Since this is could have a significant impact on personnel resources, the time and labor savings should not be left out of the equation. Along with the 855 is the Advanced Ship Notice which may be a bit harder to quantify in terms of savings to the bottom line, but most surely allows your customer to be more efficient in receiving your shipments, creates a stronger relationships within your trading partner community, and gives your company an advantage in the marketplace. This sort of goodwill can in effect become a priceless commodity.

It is important not to forget the fact that savings within the EDI program is not limited to order entry. In fact the more transactions that are generated and supported can bring more efficiency and goodwill to the total partner relationship. While this sort of cost analysis may be a timely endeavor, it has been my experience that it is a most worthwhile undertaking and will allow the organization to gain efficiencies that only compound over time.

 

 

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